Refinery Strike Closes Forties Pipeline; 700,000 b/d Shut-In

The Ripple Effect

An isolated industrial dispute has sent a wave of impacts through United Kingdom, European, and international energy markets, with a significant proportion of the United Kingdom's oil and gas output forced to halt. Around 1,200 workers at the Grangemouth refinery in Scotland walked off the job yesterday, beginning a 48-hour strike over proposed changes to staff pensions. The industrial action has forced plant owner Ineos completely to close the refinery, the only such facility in Scotland. Ineos began ramping down production at the plant last week, announcing on Friday (25 April) that it had completely halted operations.

The refinery's closure is having a widespread impact. News of the imminent shutdown last week prompted fears in Scotland over a fuel shortage. Grangemouth is the primary fuel producer in Scotland and is responsible for around 10% of the United Kingdom's overall petroleum product output. Despite assurances from the Scottish government and industry authorities that supplies will remain sufficient, many motorists in Scotland and northern England rushed to fuel stations to stock up ahead of the strike. The Scottish government has moved to head off any shortages by shipping in around 65,000 tonnes of additional fuel—primarily diesel—from Europe. The extra deliveries are estimated to provide around 10 days’ worth of supply.

However, the potentially more serious ramifications of the action are occurring upstream. The Grangemouth refinery provides electricity and steam to the nearby Kinneil oil terminal, which processes North Sea oil delivered through the Forties pipeline system. Despite last-minute efforts by Ineos to maintain operation of the electricity and steam units during the strike, the units have been forced to close, prompting Forties system operator BP to shut down the Kinneil plant, cutting off the Forties pipeline (see United Kingdom: 25 April 2008:Grangemouth Refinery Closure Sees Uncertainty in North Sea Oil Market).

The closure of Forties represents a major disruption for both U.K. and international oil supplies. The pipeline carries oil from up to 70 North Sea platforms with a total capacity of over 700,000 b/d. Around two-thirds of the oil delivered to Kinneil is immediately exported to international markets. The shut in of such a significant production stream put further pressure on oil prices, with Brent crude rising US$0.72 on opening this morning to reach US$117.06 a barrel. Furthermore, the shutdown has also cut natural gas production from Forties fields that produce both fuels. As much as 3 bcf/d of natural gas production may be affected, according to BP spokesman Richard Grant, equivalent to around to 30% of current U.K. demand. Industry body Oil and Gas U.K. has estimated in total the lost production arising from the pipeline closure will cost the U.K. economy around £50 million (US$100 million) per day.

Outlook and Implications

With the strike causing such widespread disruption, refinery workers may be hard-pressed to win support from the public for their bid to overturn proposed pension adjustments. Nevertheless, workers began their second day of strike action today, with no immediate signs that the protest would be called off before its scheduled completion. Attention is now turning to how quickly affected production will be able to get back onstream. In a positive sign for global crude markets, BP has indicated it will be able to have the Forties pipeline system up and running within 24 hours of the scheduled end of the strike at 6am tomorrow, although it could still take further time for shut in production from affected fields to be brought back onstream as systems and infrastructure are checked.

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